Case Scenario 3: Barracuda Inc

question 160

True/False

Case Scenario 3: Barracuda Inc.
Barracuda Inc. has diversified beyond its early base as a lamp fixture manufacturer into multiple hardware and plumbing fixture products that it sells to professionals (i.e., plumbers and electricians)and through the large volume do-it-yourself (DIY)stores like The Home Depot and Lowe's. While this successful growth has been achieved primarily through acquisition, the company tends to let the acquired businesses run independently. It has done so by looking to fragmented industries to acquire small firms with efficient operations and good management teams. It then grows these businesses through a combination of internal cash flow and debt, and directs new sales to the professional and DIY channels. Barracuda has been particularly successful in the faucet segment, which it practically reinvented though such technological innovations as the washerless faucet, and marketing innovations like branding and good-better-best merchandising. Barracuda has leveraged this merchandising strategy across its businesses and, coupled with the explosive growth of the DIY channel, is spectacularly profitable with a net profit after tax (NPAT)of 18 percent. The firm's management is looking to broaden its revenue base and has identified the home furnishings business as sharing many characteristics with faucets, prior to Barracuda's entry into faucets. It plans to enter this industry through large-scale acquisitions. The landscape of the U.S. home furnishings manufacturing industry consists of many players, none with controlling share, and serious issues of overcapacity. There are presently 2500 home furnishings firms, and only 600 of those have over 15 employees. Average NPAT is between 4 and 5 percent, which also reflects the fact that few firms have good managers. While the industry is still primarily composed of single-business family-run firms, which manufacture furniture domestically, imports are increasing at a fairly rapid rate. Some of the European imports are leaders in contemporary design. Relatively large established firms are also diversifying into the home furnishings industry via acquisition. Supplier firms to the home furnishings industry are in relatively concentrated industries (like lumber, steel, and textiles), and therefore typically offer fewer accommodations to the small furniture manufacturers. Retailers, the intermediate customer of the home furnishings industry, are becoming increasingly concentrated and the few large, successful furniture companies actually have their own stores or have dedicated showrooms in the larger department stores. Customers have many products to choose from, at many different price points, and few home furnishing products beyond those of the larger companies have established brands. Also, customers can switch easily among high and low-priced furniture and other discretionary expenditures (spanning plasma TVs to the choice of postponing any furniture purchase entirely).
-(Refer to Case Scenario 3). Barracuda's acquisitions have been driven by the need to increase market power and hence have been mostly horizontal and vertical acquisitions.

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Definitions:

Fixed Budget

A budget that outlines expected revenues and expenses over a specific period, which does not adjust in response to changes in business activity levels.

Static Budget

A budget that does not change or adapt to variations in business activity levels throughout the budgeting period.

Sales Variance Analysis

A financial process used to compare the actual sales against forecasted sales to understand variances and their causes.

Planning

The process of setting objectives, determining strategies to achieve them, and coordinating resources to execute the strategies.